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S. Sivakumar

The latest events in the US have come as a wake-up call for India's auditing profession. The ICAI should play a more proactive role. The Government, on its part, would do well to arm the ICAI with more penal powers.

THE goings-on at Enron, WorldCom, Xerox, Tyco and at our own Tata Finance have made everyone aware of the potentially dangerous results of false and creative accounting practices. Investors, the world over, are now scrutinising financial statements with much care and companies are going all out to improve disclosure. The role of the Institute of Chartered Accountants of India (ICAI), the governing body of the self-regulated chartered accountants' community, has also been brought into the debate. Involved are several critical issues that need close scrutiny.

The first relates to the professional competence of the Indian CA. While debating this issue, one needs to understand the legal and professional environment under which the Indian auditor works compared to his peers in another country. In the US, for instance, over the last few decades a clear demarcation has emerged among the various segments within the broad accounting area. There are hundreds of CPAs who only handle the `preparation of accounts', in contrast to many others who only handle issues related to the Inland Revenue Service (IRS).

The stringent legal environment prevailing in the US has led to the emergence of specialists in each of the sub-areas — preparation of accounts, IRS matters, auditing, etc. — and it is very common for CPAs who specialise in, say, accounting to feign ignorance of IRS issues.

Compare this with the Indian scene. The typical Indian CA is an all-rounder — he assumes a multi-dimensional role putting on several hats simultaneously, including those of an accountant, a direct tax consultant, a commercial tax consultant, a corporate law consultant besides, of course, being an auditor. In many cases, the Indian CA also advises his clients on issues related to financing, banking, etc., which again, is very uncommon in the US. Thanks to the very curriculum of the Indian Chartered Accountancy course, the Indian CA is highly knowledgeable in various fields, from accounting to financing to corporate laws to business laws. This perhaps explains why many Indian CAs, doing very well in the corporate sector in areas of accounting, finance, taxation, etc., also do very well also in general management positions. It would be safe, therefore, to assume that the Indian CA has a more solid academic and professional background than his MNC counterpart and this should answer questions on his professional competence, clearly in his favour.

The second issue concerns the role of the ICAI as an efficient regulator of the profession. The ICAI's record, as the regulator, in handling cases against its members, over the years, does seem to be impressive. It has heard more than 10,000 cases of misconduct and taken action against some 1,600 auditors, over the years. It has also referred about 1,650 cases to the High Court for further action, including punishment. Of course, this is not to say that things cannot be improved in this area. The current procedure, involving the ICAI's Disciplinary Committee holding an inquiry into the alleged misconduct (falling under Part 2 of Second Scehdule — dealing with major offences like gross negligence, not following major audit norms, etc.) and sending a report to the ICAI Council which, after going through the report, if satisfied, to make a reference to the High Court for further punishment, may need to be looked afresh.

Overall, it does seem that the ICAI has been doing a decent job as a self-regulator of the auditing community, over the years. What needs to be done is to give it with more teeth, which would make the erring members dread its bite.

The third issue relates to role of the ICAI in developing proper and adequate accounting standards which would increase the dependability of financial statements. The ICAI has been structuring its accounting standards on the International Accounting Standards, which employ concepts and `prudence' as the principle in contrast to the US GAAP, which is very "rule oriented", detailed and complex. It is quite easy for the US accountants to handle issues that fall within the rules, while the International Accounting Standards provide a general framework of accounting standards, which emphasise "substance over form" for accounting. These rules are less descriptive and their application is based on prudence.

The ICAI has introduced more than 13 accounting standards over the last two years and would seem to have made up for its inaction in this critical area over the years. With 28 accounting standards to be followed now, it can be reasonably said that the Indian GAAP can be compared with the GAAP that prevails in advances countries.

Comparisons are often made out between the situation in the US with that in India, in the area of accounting standards and, invariably, the ICAI is made out as the `villain' in not doing its job. It would be worthwhile looking at certain developments in the area of accounting standards. First, a new Section 210A was introduced in the Companies (Amendment) Act, 1999 to provide for the constitution of a National Advisory Committee on Accounting Standards (NACAS), consisting of members drawn from, among others, the Central Board of Direct Taxes, the RBI, SEBI and the Comptroller and Auditor General of India.

What is broadly missed in this issue is the fact that in India, unlike the US, less than 10 per cent of its total number of companies is listed on stock exchanges, and more than 90 per cent of companies have a paid-up share capital of less than Rs 50 lakh. Direct comparisons with the US situation may be totally misleading, and the need of the hour is to evolve accounting standards which will cover these non-listed/closely-held companies, and the ICAI can do a good job in this task, with active co-operation from bodies like the DCA and the CBDT. India can perhaps follow the British model wherein smaller companies are allowed to follow the Financial Standard for Smaller Enterprises (FRSSE), which is a watered down version of the standards issued by the Financial Reporting Council of the UK.

On several other fronts, it would seem that the ICAI has been quite proactive. Effective April 1, 2002, it has mandated that the auditors of a company should not offer consultancy services to the same company. It has also debarred any other firm of which the partners and their relatives, of the auditing firm are directors or shareholders, from taking up consultancy assignments. The ICAI has also initiated a process of peer review, beginning April 1, 2003, under which an accounting firm (other than the company auditors) appointed by the ICAI will review the financial statements of public sector units, banks and all listed companies with a turnover of more than Rs 50 crore.

Lastly, one needs to understand that, under the present framework, an Indian auditor is only expected to be a watchdog and not a bloodhound. With the primary responsibility of the preparation of the accounts resting squarely with the company, all that the auditor is required to do is to express his opinion whether the accounts present a true and fair view. The auditor is in no position to force the company to follow the mandatory accounting standards nor can he refuse to sign a balance-sheet, which has not been prepared in accordance with the accounting standards. The only way out for him is to qualify his report and here again, he may be in no position to quantify the effect of the non-compliance of the accounting standards.

Surely, the latest events in the US have come as a wake up call for India's auditing profession and, especially, to the ICAI, which should play a more proactive role. The ICAI needs to take the criticisms in its stride and try and improve things. This is the only way the ICAI can justify to the world that no external regulator is required to discipline its community. The Government, on its part, would do well to teeth the ICAI with more penal powers and at the same time, increase the coordination between the various regulating agencies such as the RBI, SEBI, DCA and the CBDT and the ICAI. The need perhaps of the hour, is to strengthen the ICAI rather than demean it.

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